I totally understand if Thursday’s market machinations worry you.
Down days are difficult to endure, and that often leads us to question all of our decisions.
Should I sell? Buy? Hold?
Trust me, we’ve all been there… and this isn’t the first time I’ve written these words either.
I wrote ‘em in January, February, March, May… I mean, I’ve written them darn near once a month all year. The September 2021 stock market dip is no different.
Here’s why…
Source: Bloomberg
Interesting how regular that periodicity is, right? Almost like we can set our watch by it or something.
Well, you can.
That regularity you’re looking at is the period when monthly options expire.
This one may be particularly squirrely in that stock index futures, stock index options, stock options and single stock futures all expire on the same day in March, June, September and December.
Market nerds call this “quad witching,” and it’s usually fraught with unusual market activity.
Or at least, it’s unusual if you don’t know what to expect.
And that can be very disconcerting if you don’t have a method to guide you during this September 2021 stock market dip.
Now, I could explain the mechanism in play here — it’s probably delta hedging. But it’s complicated, it involves a lot of math and it might not really help you much.
As such, I think it’s just better to explain my method, which I’m happy to share with you again here.
Examining the September 2021 Stock Market Dip
My method to determine relies on three things:
- Volume
- Volatility
- The volatility of volatility
Here’s how it works…
If prices move down on increasing volume, that confirms the overall price trend. Let’s look at the SPDR S&P 500 Trust ETF (NYSEArca: SPY) to get a feel for how the market behaved.
Source: Bloomberg
Nope… nothing to see there. In fact, the S&P 500 is still holding its long-term uptrend.
Now let’s check volatility — for the S&P 500, that’s the VIX Index — and see if it is breaking above trend.
Source: Bloomberg
Nope again.
Now, it’s possible, perhaps even likely, that we see a continued rise in volatility (and therefore falling prices) next week. That has been the case most of the year.
But as long as the VIX makes another lower high — stays below 25 — then the uptrend in the S&P 500 will likely remain intact.
Just as a final check, let’s look at the 30-day volatility of the VIX, which usually begins to increase before the VIX itself increases.
Source: Bloomberg
Nope, nothing yet.
It’s a little interesting that the 30-day volatility of the VIX has been making higher highs since May.
That is probably something we should keep an eye on as we head into the last quarter of the year.
But in general, I don’t see anything that would scare me out of broadly buying the September 2021 dip in the broad market here.
And I’m feeling frisky.
So How About We Buy the Damn Dip?
Let’s target the Direxion Daily S&P 500 3X Bull ETF (NYSEArca: SPXL), which is a way to get some leverage on any move in the S&P 500.
So if the S&P 500 moves up 1%, shares of SPXL move up 3%.
Of course, it works the same way in the opposite direction too, so we must be pretty careful.
Here’s how we’re going to play it.
Every options expiry week for the past four months have looked exactly the same.
Source: Bloomberg
First, prices bottom out around options expiry.
Then, they run to new all-time highs.
Around the first of the month, they hit their peak .
And finally, they begin to fall back in the week leading up to expiry making a new higher low.
Every. Time. That higher low has been very close to the halfway point between the prior low and the recent high.
In trader parlance, we call that a “50% Retracement,” and this series has been one of the most regular I’ve ever seen.
So let’s set up a bear trap for SPXL.
First, divide the size of the trade you want to make into four parts.
What I mean is, if you wanted to put down $100 on the trade, don’t buy all $100 at once — spend $25 at a time.
First, make one order at market sometime around the open Friday.
Then take whatever that remaining amount is and set three equal-sized limit orders at these levels:
- One limit order at $120.77 per share.
- The second limit order at $119.07 per share.
- And the third limit order at $117.77 per share.
If SPXL opens below that first limit order tomorrow, feel free to make the first market order and I’ll issue another limit order target price later.
The last four months, this strategy has resulted in gains of 32%, 15%, 17% and 20%
So at worst, this should average around $119.75 and give us a shot at about 20% upside versus downside risk of just 2% or 3%.
And in the meantime, keep an eye on your inboxes. I’ll be back Friday to provide an update on this trade idea for the September 2021 stock market dip… and to give you our regular weekly wrap-up.
Stay frosty folks… and BTFD!
All the best,
Matt Warder
